Updated 4.10pm

High inflation is expected to persist in the foreseeable future, Finance Minister Clyde Caruana warned social partners on Monday as he said the government will need to narrow the national deficit in line with EU rules.

Addressing the Malta Council for Economic and Social Development (MCESD), Caruana said that higher oil prices, together with the supply chain effects of the war on Ukraine and the COVID-19 pandemic meant that prices across the world were expected to continue rising.

The finance minister said inflation increased in the United States last month, and the EU could follow suit. 

In July, Malta’s inflation rate was at 5.6 per cent compared to the previous year, with rates even higher for food and non-alcoholic beverages (10 per cent), and housing, water, electricity, gas and other fuels (7.6 per cent).

“It is clear that the inflation rate has a long time before returning to the levels of around 2% we had become accustomed to in the past,” Caruana said.  

Caruana's warning comes ahead of a key European Central Bank meeting, scheduled for Thursday, in which it must decide whether or not to raise interest rates. 

The EU is currently in a challenging economic position, with its largest economy, Germany, officially in recession. On Monday, the European Commission downgraded its  EU-wide growth predictions for 2023. It now expects average growth of just 0.8 per cent this year. 

Malta's economy is forecast to grow at a significantly higher rate of 3.9 per cent this year. 

However, the country is running one of the EU's highest budget deficits, with expenditure significantly outstripping income for the past years.

Those high-spending tactics will soon need to be reined in, however, as the EU looks to curb inflation by revising its fiscal policies to reintroduce limits on deficits and debt levels.  

The EU had relaxed those rules when the COVID-19 pandemic struck, allowing member states to spend more liberally to prop up their economies. 

But it is now working to reintroduce excessive deficit procedure rules by bringing back the 3 per cent deficit limit, with some flexibility. Governments will also be penalised if public debt levels stretch past 60 per cent of national GDP.

Those revised rules are expected to come into force next year, though the EU has said it will allow for a gradual transition. Several key EU member states, such as Italy and France, have debt levels well over 100 per cent of their respective GDP. 

Malta had a budget deficit of some 5.6 per cent last year and Caruana said he expects that to drop to around 5 per cent by the end of this year. That is lower than the government's initial 2023 forecast a year ago but still significantly higher than the 3 per cent limit the EU plans to introduce. 

Debt levels, however, are still significantly below the maximum EU threshold, at 53 per cent of GDP.   

Speaking on Monday, Caruana acknowledged that Malta's deficit would still be above the 3 per cent level next year. He acknowledged that this would need to come down and said work was under way to identify ministry budget lines that could be slashed. 

Energy subsidies will however remain in place, the minister said, despite both the European Commission and International Monetary Fund having nudged Malta to wind them down.

The subsidies are costing the government hundreds of millions of euro a year.

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